Sunday, July 31, 2011

Says PH needs baseload plants, lower power rates

The government should find ways to drive current electricity prices down before introducing another burden to consumers and industries through the feed-in tariff (FIT) rates for renewable energy projects, the influential Philippine Chamber of Commerce and Industry said.

PCCI energy committee chairman Jose Alejandro said power rates were expected to increase even more next year due to the expiration of the transition supply contracts (TSCs) attached to the privatized plants and independent power producer (IPP) contracts of National Power Corp.

“Can we expect that the new contracts that will be negotiated will have lower rates than the old TSCs? Of course not. We expect the new rates to be higher,” Alejandro said in an interview Friday.

These would be further exacerbated by petitions by Power Sector Assets and Liabilities Management Corp. for the universal charge, as well as the generation rate adjustment mechanism (GRAM) and the incremental currency exchange rate adjustment (Icera), automatic adjustments that could move rates either up or down.

The introduction of the FIT rates for renewable energy projects would add another burden to consumers and businesses, Alejandro said, making the country even less competitive on the global stage.

“We’re already charging too high for power. It would have been okay if we were just one or two centavos higher than our neighbors, but our rates are double or even triple those of other countries in the region. We can’t have any more increases,” Alejandro said, referring mainly to the FIT rates.

The FIT scheme assures renewable energy developers of future cash flow as electricity end-users will be charged fixed amounts to cover the production of energy from renewable sources.

Payment for the use of clean energy will come from a uniform per-kilowatt-hour charge, dubbed FIT Allowance (FIT-All), which will be collected from all electricity end-users.

The National Renewable Energy Board recently approved a FIT rate of 12.75 centavos a kWh for renewable energy projects. This universal levy would be borne by all power users by 2014, when all expected renewable energy projects would have already gone on line.

Instead of pushing to get renewable energy projects on line, Alejandro said the government should focus on getting more commitments for additional baseload generation capacity.

At this point, Alejandro said, the country already had enough renewable energy capacity from its numerous hydro and geothermal installations. Some projects such as biomass and mini-hydro could be installed in off-grid areas. Solar and wind, however, should take a backseat—at least for the next three to five years.

“Our priority should be building baseload and reserve capacity and bringing power rates down. We need sustainable, reliable power supply. We don’t need [renewable energy] now. It’s not reliable, it’s not controllable, and it’s very costly,” Alejandro said.

“It will be counterproductive for the country to focus on [renewable energy]. Let the technologies mature first, but in other countries, not here. We can still catch up, especially when the technologies become much cheaper to install,” Alejandro added.

Monday, July 25, 2011

Dr. John Nye

Who is Dr. John Nye? He was the valedictorian of President Noynoy Aquino’s Ateneo high school class of 1977. After high school, he went to California Institute of Technology and got an undergraduate degree in physics. He shifted to economics, however, and obtained a master’s degree and a doctorate in economics from Northwestern University.

Dr. Nye is currently the Frederic Bastiat Professor of Political Economy in George Mason University. He’s prominent in the field of new institutional economics and is an avowed disciple of Douglass North, a Nobel Prize winner in economic science, whom he brought into the country about four years ago, to give a series of lectures on institutional economics.

Dr. Nye’s father is Chinese, a successful businessman who had fled China when the communists took over. However, his mother is Filipina, a justice in the Court of Appeals.

After an absence of many years, but after he brought North to the country, he has been visiting the Philippines. One advantage of Dr. Nye as an analyst and observer of the Philippines is that he’s both an “outsider” and an” insider.” He’s far enough that he has an unjaundiced view, uncontaminated by the usual chatter among the elite, but close enough, because he’s after all a Filipino, having been born and raised here.

I’m writing about Dr. Nye because I think he has very important things to say about Philippine economic reforms. However, except to a few in the academic and international development agency community, his views are not well-known.

It’s also too bad that despite his school ties to President Aquino, the current government seems either ignorant of or indifferent to his sharp analysis and recommendations.

He’s also different in many ways from econometric-spouting, formula-wielding economists because his views are infused with political economy and real world observations of elites, coalitions, interests, and institutions.

Dr. Nye’s main point is that the government and the international development agencies don’t seem focused on what he calls “first order” economic reforms, addressing the main impediments to growth. Too often, he says, much effort is directed toward tax increases and achieving fiscal balance or emphasizing the need for infrastructure spending but without addressing major structural imbalances in the economy.

He believes the principal problem of the Philippines is its extreme dualism: a tiny manufacturing sector employing just about a quarter of the workforce and a vast agricultural and service sector employing the rest in low-productivity, low-wage jobs. Why is this a problem? According to Nye, this is an indication that major barriers exist in moving people out of the low-productivity agricultural sector to the more highly productive modern industrial sector. Indeed, the story of China is that of a vast number of the labor force moving out of agriculture and the countryside to the industrial sector in the cities.

What is preventing this necessary migration from low-productivity sectors to high-productivity sectors, a condition found in many growth stories? According to Nye, a combination of high minimum wages and strict employment protection in the industrial sector is preventing industry from absorbing more labor. The perverse effect of these labor market rigidities is that much of the workforce is stuck in low-wage, low-productivity, short-term jobs.

Citing labor economist Manny Esguerra, Nye says that the country has one of the highest minimum wages in the world. In 2007, the Philippines had the 28th highest minimum wage in the world at purchasing power parity (PPP) rates, and the 8th highest minimum wage out of a group of 30 developing economies.

According to Nye, one evidence of the perverse effect of a combination of high minimum wages and labor protection regulations in the industrial sector is that the unemployment rate among the college educated is far higher than the unemployment rate among those who have lower levels of educational attainment. Again citing Esguerra, he says the unemployment rate is 10.6% for the college-educated, compared to 8.6% for those who only completed high school, and 3.3% for those who just finished elementary.

In other words, the high unemployment rate among the college educated shows the high barriers to entry to the regulated industrial sector while the lower unemployment rate among the less educated shows lower barriers to entry in the unregulated, but low-productivity, agricultural, and services sectors.

Labor market rigidity is an important problem because growth happens when people move from lower productivity jobs to higher productivity jobs, but that’s not being allowed to happen.

Another perverse result is that the country’s skilled labor moves to other countries to get jobs, where they are “exploited” and benefit their host country.

Other high-minded, but misguided policies such as the prohibition of conversion from agricultural land to industrial use are also contributing to this problem, says Nye.

The movement from agriculture to industry is further hampered by policies like the CARP (Comprehensive Agrarian Reform Program), which keeps farms small, inefficient, and backward.

His Ateneo yearmate, President Aquino, whose principal program of government is fighting corruption, should take note, because according to Nye, “...limiting corruption without reforming a legal and regulatory system that encourages and supports a distorted economic system is both futile and is likely, even with partial success, to encourage longer-run dysfunctions by increasing the strain between what is demanded and what opportunities are being bypassed.”

On August 4, Dr. Nye will give a lecture, sponsored by Asia United Bank, on “Speeding Up Philippine Economic Growth: A Historical and Institutional Perspective.”

Friday, July 15, 2011

Calamba City, Philippines. Foundation for Economic Freedom (FEF) President Calixto V. Chikiamco and Department of Environment and Natural Resources Region IV-A (DENR-RIV-A) Executive Director Nilo B. Tamoria sign a memorandum of cooperation to advocate the implementation of the Residential Free Patent Act (RA 10023) among the local government units within the jurisdiction of DENR-RIV-A.

Through FEF's Property Rights for Economic Progress program, an initiative supported by the United Sates Agency for International Development (USAID) and The Asia Foundation (TAF), the partnership seeks to improve land administration and land titling under the said act.

Tuesday, July 12, 2011

The QE2 is about to end and employers in the US added 54,000 jobs in May, the smallest increase in eight months. Economists expected the numbers to show employers added 165,000 jobs, according to the median forecast in a Bloomberg survey. All that plus the unease over the gridlock surrounding the partisan debate on adjusting America’s debt ceiling have all combined to douse hopes for stronger economic recovery soon.

But it isn’t as if America has run out of resources. Government may have budget problems but American businesses are doing quite well. They have trimmed their costs and have been lean and mean for sometime now. US businesses have also done quite well overseas, notably in emerging markets so that observers say they are sitting on piles of cold cash. If only they would start hiring and investing… the economic recovery can be more certain. Instead, there are talks of a possible double dip.

Indeed, Austan Goolsbee, President Barack Obama’s chief economic adviser, observed in an interview I monitored last Sunday on CNN’s “State of the Union” program said, “Corporations have become profitable again. What we need to do now is get the private sector stood up. We want to leverage the private sector money.”

In other words, the government wants private businesses to spur job growth. To help convince private businesses to start spending, Goolsbee said, the administration is aiming to make it easier and cheaper to create private sector jobs through payroll tax cuts and investment subsidies. I understand US multinationals are also waiting for some changes in the tax code before they bring home profits sitting in foreign banks.

In a way, it can be said that we have a similar situation here. The BSP has been for months saying there is so much excess liquidity sloshing around so that special BSP accounts have been created to mop some of these up. Our taipans are oozing with more cash than they know what to do with. Many have started to invest more heavily in China. Most are investing in building condo units all over the metropolis.

I guess many would have noticed by now how feverish the competition is among condo property developers. The SM Group has jumped into the market in a big way. Henry Sy Jr. told me some months ago that the SM Group has in fact overtaken Megaworld in the affordable condo market for the middle class.

Surprisingly, the high end market has not lost its luster. Some developers say they should have built more units with larger floor areas in the 3BR category because these are selling better than the virtual bird houses with floor areas barely enough for a bed and a dining table. The rich are accumulating more wealth than they know how to use in socially productive ways.

I am not sure it is a good idea for our taipans to just put their money on condo development, given that there are obviously better uses for local capital such as the various PPP projects. The administration’s problem is how to convince them to risk their money on more productive ventures like MRTs and expressways. To begin with, P-Noy’s boys are still trying to get their act together on PPP.

But there it is. In the US as it is here, government may not have the budget for needed infrastructure or the ability to create needed jobs to cut the unemployment rate. The private sector, on the other hand, is reported to be sitting on piles of cold cash waiting for good investment opportunities. Indeed as Goolsbee puts it, we can leverage private sector money.

We don’t need to list down everything that must be done to get private sector investment confidence. P-Noy should know that by heart after a year in office. The trick is in how to get going. For starters, pay attention to folks like Metro Pacific and San Miguel since both have expressed a desire to invest big on infrastructure here. The ODA-obsessed bureaucrats at DOTC and NEDA are snuffing their interest out.

I suppose a Mar Roxas by P-Noy’s side in Malacañang will go a long way to reassure private sector investors. So will the appointment of a credible replacement to Ping de Jesus at DOTC, someone like Rene Almendras.

Beyond appointments, the administration must get really going and start delivering on low hanging fruits (like developing Clark as a budget airline hotspot in the region) and instill confidence that corruption will be managed to extinction. It is possible to leverage private sector resources to accelerate the nation’s growth… but not before private sector investors become really confident that indeed this time government means business.

Renewable energy

Beyond the subsidy called Feed-in Tariff, there are other things that ought to be looked at before we agree to allow them to put additional burdens on our power users. For instance, it is not clear, the position paper of the Foundation for Economic Freedom (FEF) observes, what is it exactly that the envisioned FIT program is supposed to buy us?

“Is it to lower our carbon emissions in order to help arrest global warming? Our carbon footprint is a rounding error vs. the large and more industrialized countries, and our RE component, at 30 to 40 percent of installed capacity, is already five times the global average.”

Romy Bernardo who spearheaded the paper’s drafting illustrates: The subsidy cost for solar per kWh is over P12. (calculated as the FIT rate of P17.95 less avoided cost of P4.50/kwh or the cost of buying at the current grid cost). One can lower consumption of power by giving away new efficient light bulbs that produce 60 watts of brightness at 15 watts use of power. Based on the calculation, by an ADB expert, the cost of doing this translates to $0.025 per kWh saved, roughly ten centavos/kWh saved. The numbers are striking-- P12 solar vs. P0.10 for energy efficient light bulbs.

In short, just give free light bulbs and you can do more than 100 times the benefit in terms of reducing carbon footprint for the same peso spent from public purse. A slightly clever solar operator selling at FiT rates can put solar panels under a light bulb, run even when there is no sunlight (like even night time) to get paid for power at P 17.95 per kWh, and only incur cost of P4.50 per kWh to buy power from the grid for the light bulbs.

Delayed flights

My mother-in-law left for the US last weekend via Hawaiian Airlines. The flight was fully loaded and ready to take-off as scheduled. But they had to wait for over an hour because of the air traffic congestion at NAIA. Unfortunately, most of the passengers on that flight are bound for Los Angeles via Honolulu. They have a very tight window to catch the connecting flight to Los Angeles.

Because of the one-hour delay in Manila, the Los Angeles flight was delayed as well. If this is how we are going to run NAIA in the near term, we can forget about more airlines wanting to add Manila in its route map. On the contrary, there could be those already flying to Manila who may decrease their frequencies or even drop Manila altogether.

Maybe the problem is that Malacañang now and in the past, have this penchant of appointing retired air force generals, with no experience in running a free market sari sari store, to run our airports. We need proven managers who know their business. In fact, the management of our airport should be privatized to a qualified international airport management firm. It is possible that we are already paying the price for world class management but are just not getting it. If not, we should be willing to pay for it. We probably need less people but more capable ones.

For so long as we are running the airport like a government bureaucracy, NAIA will remain a third world airport that embarrasses every Filipino every day.

Memo to P-Noy: Why be satisfied with Third World when World Class can be had?

Air Asia Philippines

A correction on the Filipino ownership structure of Air Asia Philippines: Tonyboy Cojuangco 20 percent; Maan Hontiveros 20 percent and Mikee Romero 20 percent… not 60 percent for Tonyboy as I indicated last Monday which actually refers to total Filipino ownership.

Medical history

These are notes on some patient’s medical history sent in by Lito Balquiedra.

Patient has two teenage children, but no other abnormalities. She stated that she had been constipated for most of her life, until she got a divorce.

Sunday, July 10, 2011

We all want renewable energy, of course. With supply infinite and non-pollutive, it is the smart alternative to dwindling dirty sources like diesel and coal. But should we go into solar and wind if it would swell our electricity bills? Certainly not. More so, if that extra cost amounts to P8 billion a year, for 18 years, or a total of P144 billion.

The P8 billion yearly is what the government wants consumers to subsidize for R&D of solar-wind technologies. The National Renewable Energy Board is petitioning the Energy Regulatory Commission to insert it in electricity bills, as suggested in a new law. If the ERC consents, consumers will fork up an additional 12 centavos per kilowatt-hour of electricity. Philippine electricity notoriously is the costliest in Asia, a dampener to investments and dread of households.

The government would grant P17 per kilowatt-hour for solar R&D, and P10 for wind, for close to two decades. This will multiply electricity production costs six times. Romeo Bernardo, former undersecretary of finance asks if it’s still affordable. Conventional sources cost only P5 a kilowatt-hour to produce, on average.

The Foundation for Economic Freedom is sounding the alarm against the rent-seeking subsidy. The money will go to “rich solar and wind producers, at the expense of Philippine industry and the Filipino consumer,” the FEF says. The organization of economists posits that, if the Philippines must subsidize renewable R&D at all, it should be for biomass and run-of-the-rive hydro. These types would benefit rural areas more. By contrast, solar and wind are unsteady and unreliable because dependent on weather, according to FEF president Calixto Chikiamco.

The government views the subsidy as the Philippine contribution to reducing carbon emissions. But the FEF counters that the country’s emissions are less than one percent of the world’s, while 30 percent of its power already derive from renewable geothermal. So much for the rent seekers’ green cover.

The STAR columnist and FEF member Boo Chanco questioned recently the subsidy’s 18-year duration. Quoting a solar industry exec’s report to stockholders, he said their output would match grid parity in three to five years. So why lock consumers into a two-decade payout, instead of waiting only awhile for solar and wind to catch up.
Abroad solar and wind subsidies are also under fire. Boo cited market trader Jim Chanos’s debunking of the energy’s vaunted cost-efficiency. In a presentation entitled “Does Wind + Solar = Hot Air?” Chanos pointed up overblown figures, including supposed jobs generation.

* * *

The private operator of the state’s power gridalso is seeking a rate hike of 20-28 centavos per kilowatt-hour over the next five years. This is to recover P173 million in damages from Storms Ondoy and Pepeng, and the bombing of a transmission line in Mindanao, all in 2009.

Insurance normally should cover the indemnity that the National Grid Corp. of the Philippines is asking for. The Government Service Insurance System officially insures all of the state’s P2 trillion worth of property. It then awards the policies to private re-insurers, theoretically at an income to and protection for GSIS.

It turned out, however, that one big company bagged most of the GSIS reinsurance deals in 2008-2010. This included the power facilities operated by the NGCP.

Documents showed that the re-insurer won without bidding, only renegotiation. The GSIS at the time gave 12 competitors only 12 days to fill up three-inch-thick bid documents. When none were able to meet the deadline, the existing re-insurer prevailed through contract extension. In the resulting deal, the NGCP would only be able to claim damages if the losses hit $5 million, or P225 million at the time. That is why it is seeking to recover — via electricity rate increase — the P178-million cost of repairs from the storms and terrorist attacks.

The new GSIS board recently renegotiated anew, and got better terms. This means the previous board had conceded too much to the re-insurer, to the detriment not only of the NGCP but likely other agencies as well. This means the old GSIS directors must be made to answer for transactions grossly and manifestly disadvantageous to government interest.

* * *

Last May 16’s Hotdog Reunion couldn’t be for one night only, as billed. Not with many fans missing the Pinoy pop-rock band’s show for frustrating reasons. Not after the event’s rave reviews. And certainly not with the many rekindled memories: like, the puppy love in “Pers Lab”, or the big crush who dumped you in “Beh Buti Nga”.
So there just has to be a “Hotdog Reunion Concert: The Repeat,” on July 26, 2011, starting with 7:30 p.m. dinner, at Dusit Thani Hotel ballroom, Makati City.

About Me

FEF is a public advocacy organization dedicated to advancing the cause of economic and political liberty, good governance, secure and well-defined property rights, and market oriented reforms. It counts among its members former and present Cabinet secretaries and undersecretaries, leading figures in the academe, respected media personalities and opinion makers, and prominent members in the business and finance community.